$2 million in a second? Without risk? On the blockchain, that's not a problem. Flash Loans – although introduced to the Ethereum network by Marble Protocol in 2019, are only now gaining popularity. Why?
The answer is simple: Arbitrage. But let's first start with what flash loans are. A flash loan is an uncollateral loan that can be granted to anyone for any amount. Its condition is that the loan is repaid in the same transaction. A transaction can be a set of arbitrage operations that, when completed, can turn profitable. If the transaction generated a profit—it goes to our account, and the amount of the loan along with the commission (usually a fee of less than 1%) returns to the owner. If in the course of the transaction, it turns out that the loan amount can not be returned (the series of operations will end in a loss) – all transactions are automatically reversed. Risk-free. All this is possible thanks to smart contracts that ruthlessly enforce the rules. Reminder: trust is written into the Blockchain. Flash loans can only exist on a network of blocks. No centralized financial form gives us such freedom.
Arbitrage is based on taking advantage of price differences between different currency pairs. Let's assume – in a huge simplification: I own 1 Ether. The rate of Ether to Currency X is 1:1. I exchange Ether for Currency X. I own 1 piece of currency X. The exchange rate of currency X to Ether is already 1:1.01 I exchange currency X to Ether, ending the operations with 1.01 Ether in my account. Previously, in order to take advantage of such a set of operations, we needed a huge amount of funds, and still had no guarantee of success. With flash loans, arbitrage works without risk.
Arbitrage, although at first glance it may seem an undesirable phenomenon, because it takes advantage of fluctuations between currency pairs or exchanges, actually provides the markets with adequate liquidity. Over time, as more and more arbitrage attempts are made, prices unify, providing additional stability to the market.
Of course, there is no rose without thorns, and flash loans can hurt. In the right hands and circumstances, they can be a powerful tool for market manipulation. With the help of flash loans, exchanges can inflate their real turnover (volume), to the detriment of market participants. This procedure is called wash trading. In addition, less secure exchanges or dexes can become victims of hacking attacks and exploitation of security vulnerabilities (exploits). Unfortunately, as with our native BLIK, technological innovations and lack of broader knowledge of how they work opens the field to fraudsters. This is a widespread problem that affects every industry. In time, and flash loans will become more secure and understandable. Especially since the potential for innovation is enormous.
While fraud and attacks happen everywhere, Blockchain has a unique advantage over traditional markets. It is full transparency. We have insight into every transaction and every operation. Because of this, fraud is detected faster, and we can accurately trace the flow of stolen funds, and as a result, recover them more easily. Below is an example of an exploit that returned a profit of 7 million:
After tracing each action, we can, very accurately, deduce where the vulnerability appeared and how it was exploited. This knowledge allows, any subsequent developer, to avoid such a case and create universal and secure solutions much, much faster.
Flash loans are an innovation in innovation, available only on the Blockchain. Quantum is in the process of arbitrage testing on Ethereum testnets. This cutting-edge financial form that breaks the status quo in the financial system and gives us tremendous freedom and the opportunity to experiment and express ourselves in ways we haven't seen before. Widespread adoption is only a matter of time.